Trick or Treat? LVMH Buys 14.2% Stake in Luxury Brand Hermes

I read with great interest in the San Francisco Chronicle today how LVMH Moet Hennessy Louis Vuitton SA (aka Louis Vuitton)  is buying an extra 14.2% stake in French luxury brand, Hermes.  When one luxury brand wants to buy up more stock in a competitor brand during what some economists call the ‘great recession’ I find it fascinating.  Will the Louis Vuitton Alma Bag take down the Hermes Birkin in some kind of crazy hostile takeover?  LVMH sources say no. Still, when one company throws down approximately 2 billion USD to buy a stake in another, you have to wonder what it all means.  It’s no secret that some luxury brands are struggling in this tough economy. Many luxury brands will have to adjust their business models to survive. Lanvin is about to launch a fashion line with H&M.  If such a route had been available to designer Vionnet , her luxury designs might have continued through the Depression and World War II. Instead, Vionnet went out of business.

Ironically, Hermes with products priced in the thousands for their Birkin and Kelly bags, shows no signs of fading ala the original Vionnet.   In July they announced that 2010 has seen an increase in profits for Hermes.  So it’ s no surprise that LVMH Moet Hennessy Louis Vuitton SA wants to get in on a good thing.  Or is it? I had to ask Birkin expert, and book author (Bringing Home the Birkin)  Michael Tonnello about the stock purchase.  He had a few thoughts.

“In recent years Hermes has been moving away from its roots of hand-stitched and unique items, heading in the direction of more mass-production. This is evident in the fact that a Birkin is no longer entirely hand-stitched and is now readily available to anyone who walks through the door into an Hermes boutique. I think this appeals to LVMH since there is more margin in mass-production than hand craftsmanship. Hermes has gone from around 200 stores (back in 1999, when I started selling Hermes scarves on eBay) to well over 300 today, and counting., ” notes Michael Tonello. ” It’s impossible to supply all of those stores with unique, one of a kind, hand-stitched pieces.  LVMH also knows that Hermes is the aspirational brand for their LV, Celine, and Fendi customers. With the increase in global wealth many of those LV clients are now trading up, and LVMH will profit from this, rather than lose the client. Pretty clever.”

The thinking for luxury brands used to be that they would sell a top-quality, best of breed product that customers would save for, and purchase to last a lifetime.  Perhaps we are moving further, and further away from that model as mass market production, by necessity, takes away some of the quality and hand work of these items.  Now, if only the prices would adjust to the mass-market demand, then all shoppers might have a chance at owning a Hermes or LV bag.  What would it be like if LV invested their 2 billion in creating a lower-priced Louis Vuitton line that would sell well, rather than investing in a competitor? Just a thought.

To read more about how LV bought up the shares of Hermes, check out the analysis from blogger 00o00
about how LVMH went about executing the stock buy on the QT. He gives a great financial analysis that is easy to understand.